Insurer’s Duty to Defend

Four Corners Rule

In examining whether coverage exists, the analysis begins by referencing the four corners of the complaint. Granite State Ins. Corp. v. Mountain States Tel. & Tel. Co., 117 Ariz. 432, 435, 573 P.2d 506, 509 (App. 1977). If “any claim alleged . . . is within the policy’s coverage, the insurer has a duty to defend the entire suit.” Lennar Corp. v. Auto-Owners Ins. Co., 214 Ariz. 255, 261, ¶ 15, 151 P.3d 538, 544 (App. 2007).

Consideration of Extrinsic Evidence

The analysis of whether coverage exists begins with the four corners of the complaint. However, when other true facts plainly take the claim outside of policy coverage, there is no absolute duty to defend or indemnify. Granite State, 117 Ariz. 432, 435, 573 P.2d 506, 509; Kepner v. Western Fire Ins. Co., 109 Ariz. 329, 331, 509 P.2d 222, 224 (1973). The insured has the burden of proving that a claim arguably comes within the scope of the policy’s coverage. Keggi v. Northbrook Prop. & Cas. Ins. Co., 199 Ariz. 43, 47, ¶ 13, 13 P.3d 785, 789 (App. 2000).

Occurrence Requirement

General rule

In determining whether a certain situation qualifies as an “occurrence,” courts look to whether the precipitating conduct was “accidental.” Kema Steel, Inc. v. Home Ins. Co., 153 Ariz. 315, 316, 736 P.2d 798, 799 (App. 1986) (holding the filing of a lawsuit did not constitute an “occurrence” as it was not accidental). Arizona courts generally construe “accident” to mean an “undesigned, sudden and unexpected event, usually of an afflictive or unfortunate character, and often accompanied by a manifestation of force.” Century Mut. Ins. Co. v. S. Ariz. Aviation, 8 Ariz. App. 384, 386, 446 P.2d 490, 492 (1968).

Faulty workmanship and construction defect claims

In Arizona, “defective workmanship,” standing alone, cannot constitute an occurrence, but resultant damages to other non-defective property can constitute an occurrence.

“[F]aulty workmanship, standing alone, cannot constitute an occurrence as defined in [a CGL] policy, nor would the cost of repairing the defect constitute property damage.” Lennar Corp. v. Auto-Owners Ins. Co., 214 Ariz. 255, 262, 151 P.3d 538, 545 (App. 2007). The Court further found that “the damage caused by the faulty work, not the faulty work itself, constituted an occurrence, and where no property damage was alleged as a result of the faulty work, there was no occurrence.” Id.

Bodily Injury Requirement

Emotional distress

The court in Transamerica Ins. Co. v. Doe, 173 Ariz. 112, 840 P.2d 288 (1992) held that emotional distress is not “bodily injury.” However, the term “bodily injury” was not defined in the Transamerica policy.

The court held that the claimants “did not sustain a compensable bodily injury within the meaning of the Transamerica policy” because they “have suffered no physical injury, sickness, disease, or substantial pain as a direct result of exposure to the virus.” Id. at 115. The court in Transamerica held that the increased risk of developing a disease, fear of developing a disease, emotional distress and anxiety associated with the increased risk are not compensable absent a physical manifestation of the injury. Id. at 115-116. The court agreed with two other Arizona decisions (Burns v. Jaquays Mining Corp., 156 Ariz. 375 (Ariz. Ct. App. 1987) and DeStories v. City of Phoenix, 154 Ariz. 604 (1987)) that those claims may all be brought when, and if, there is an actual physical manifestation of a bodily injury (i.e., the disease actually occurs).

Consideration of physical manifestations

See above.

Property Damage Requirement

Purely economic loss

As defined in Arizona, “tangible property” means “property (as real estate) having physical substance apparent to the senses.” Travelers Indem. Co. v. State, 140 Ariz. 194, 197, 680 P.2d 1255, 1258 (App. 1984). Arizona has repeatedly held that claims asserting damage to “intangible property” do not trigger coverage under liability policies. See, e.g., id.; U.S. Fid. & Guar. Corp. v. Advance Roofing & Supply Co., 163 Ariz. 476, 480, 788 P.2d 1227, 1231 (App. 1989) (holding claims for breach of contract did not constitute “property damage” under general liability policy); McCollum v. Ins. Co. of N. Am., 132 Ariz. 129, 132, 644 P.2d 283, 286 (App. 1982) (holding loss of speculative land profits resulting from insured’s negligent misrepresentations did not constitute “property damage”).

Further, Arizona has cited with approval California precedent stating “[t]o construe the explicit words ‘tangible property’ to include intangible economic interests and property rights requires a strained and farfetched interpretation, doing violence to the plain language of the policies.” Travelers, 140 Ariz. at 197, 680 P.2d at 1258 citing Giddings v. Indus. Indem. Co., 112 Cal. App. 3d 213, 169 Cal. Rptr. 278 (1980).

Loss of use

The limited cases in Arizona that mentions loss of use are cases where there was no loss of use of tangible property. See Travelers Indem. Co. v. State, 140 Ariz. 194 (1984) (holding that there was no loss of use of tangible property to trigger coverage.); see also McCollum v. Ins. Co. of North America, 132 Ariz. 129, 644 P.2d 283 (App. 1982) (holding that future profits were not covered because there was no “injury to or destruction of tangible property” as is required before coverage is provided.) However, there are no cases addressing loss of use of tangible property and such loss of use would presumably be covered.

Trigger of Coverage for Latent Injury i.e. exposure to asbestos, silica and lead paint

Continuous trigger

In AAU v. Wood, the Arizona Court of Appeals adopted the continuous trigger in a toxic-exposure case. 209 Ariz. 137, 98 P.3d 572 (2005). The AAU court had to determine whether the trigger (i.e., bodily injury) occurred at the time of the first exposure to toxic substances (exposure theory), whether it was when the injury was diagnosed (manifestation theory), or whether it was at three separate times, including the time of the first exposure, during the time of exposure in residence (exposure is present but not diagnosed) and at the time of diagnosis (this three trigger theory is the continuous trigger). Id. at 164-165. The court adopted the continuous trigger and held that the insurer was obligated to provide coverage “if, during the policy period, [the injured parties] were either exposed to TCE, had TCE-related diseases developing internally as a result of a previous exposure, or manifested fully developed TCE-related diseases.” Id. at 167.

Injury-in-fact trigger

Not applicable.

Another trigger

Not applicable.

Trigger of Coverage Non-Latent Injury

General

The analysis of a policy’s trigger begins with the insurance policy language. AAU v. Wood, 209 Ariz. 137, 158.

Construction Defect Claims

The Arizona court in Lennar held that “pursuant to the plain language of their policies, insurers must provide coverage for ongoing property damage that occurs during the policy period even if similar damage preceded that damage.” (emphasis added.) Lennar Corp. v. Auto-Owners Ins. Co., 214 Ariz. 255, 266 (2007). The court in Lennar never expressly stated which trigger it was applying although the trigger could be described as repeatedly applying the injury in fact trigger for each policy year that property damage occurs.

Duty to Defend Covered and Uncovered Claims

If “any claim alleged . . . is within the policy’s coverage, the insurer has a duty to defend the entire suit.” Lennar Corp. v. Auto-Owners Ins. Co., 214 Ariz. 255, 261, ¶ 15, 151 P.3d 538, 544 (App. 2007).

Duty to defend contractual indemnity and common law indemnity claims

General contractor against insured

No cases directly address this issue. However, presumably a contractual indemnity or common law indemnity claim would be covered absent any limitations/exclusions in the policy. See Desert Mountain Properties Ltd. P'ship v. Liberty Mut. Fire Ins. Co., 225 Ariz. 194, 200 (App. 2010) (pointing out that the policies contain express limitations and exclusions that bar coverage for some contract claims, but finding that “[t]he fact that those express provisions do not flatly bar coverage of all contract claims supports our decision to decline to imply into the policies the broad principle that coverage is not afforded to damages arising from contract.”)

Is there an anti-indemnification statute?

Yes, A.R.S. § 32-1159; A.R.S. § 34-226; A.R.S. § 41-2586.

Insurer’s Wrongful Refusal to Defend

Reliance on coverage defenses to deny indemnity

Under Arizona law, when an insurer denies coverage, or defends under a reservation of rights, an insurer could be bound by a stipulated judgment entered into between a plaintiff and an insured defendant. This is because, in certain circumstances, courts allow an insured to assign its rights under the Policy to the injured party in exchange for a covenant not to execute on the stipulated judgment. See Damron v. Sledge, 105 Ariz. 151, 460 P.2d 997 (1969); United Servs. Auto. Ass’n v. Morris, 154 Ariz. 113, 741 P.2d 246 (1987). In such a circumstance, the insured is protected from personal liability by the covenant not to execute, and the plaintiff seeks to enforce the stipulated judgment against the insurer.

A Damron Agreement commonly refers to an agreement entered into between a plaintiff and an insured while an insurer is refusing to defend the insured. Damron v. Sledge, 105 Ariz. 151, 460 P.2d 997 (1969). In a Damron situation, the insurer has the right to contest coverage and challenge the agreement and resulting judgment on grounds of fraud and collusion. Id. A Morris Agreement commonly refers to an agreement entered into by an insured with a plaintiff after the insurer has accepted the defense of the insured while reserving its right to contest coverage. United Servs. Auto. Ass’n v. Morris, 154 Ariz. 113, 741 P.2d 246 (1987). In a Morris situation, the insurer has the right to litigate coverage, fraud and collusion, and whether the agreement/judgment is reasonable. Id.

The Arizona Supreme Court has held that when an insurer refuses to defend (Damron situation), it does so at its own peril and if a court finds coverage the insurer must pay damages awarded in the default judgment (at least up to the policy limits) unless it can prove fraud or collusion. Quihuis v. State Farm, 235 Ariz. 536 (2014).

Conditions of Coverage

Late notice

Factors considered to determine if coverage is forfeited

Arizona courts follow what is commonly known as the “notice-prejudice” rule. In essence, this rule states that an insurer cannot escape liability under a first-party or third-party insurance policy simply because the insured failed to give notice within the time limit set forth in the policy, unless the insurer can show actual and substantial prejudice. Arizona adopted the “notice-prejudice” rule in 1968 in the reported case of Lindus v. Northern Ins. Co., 103 Ariz. 160, 438 P.2d. 311 (1968); see also Zuckerman v. Transamerica Ins. Co., 133 Ariz. 139, 650 P.2d 441 (1982).

Prejudice requirement

See above; Nangle v. Farmers Ins. Co., 205 Ariz. 517, 73 P.3d 1252 (App. 2003) (“Prejudice is the key factor to consider whether to enforce a policy’s limitations clause, and Farmers showed no prejudice,” thus enforcement of the contractual time-limit was improper); and Liberty Mut. Fire Ins. Co. v. Mandile, 192 Ariz. 216, 223-24, 963 P.2d 295, 302-03 (App. 1997) (time limit in UIM policy was unenforceable absent some compelling evidence of prejudice to the insurer).

Meaning of “arising out of”

Coverage grants/agreements

In Arizona, “arising out of” has been interpreted to require a causal connection but does not require proximate causation. Colo. Cas. Ins. Co. v. Safety Control Co., 230 Ariz. 560, 567 (App. 2012); Regal Homes, Inc. v. CNA Ins., 217 Ariz. 159, 163-164 (App. 2007). The casual connection is understood to mean “originating from”, “having its origin in”, “growing out of”, “flowing from” or “incident to or having connection with”. Fimbres v. Fireman’s Fund Ins. Co., 147 Ariz. 75, 76-77 (App. 1985); Transp. Indem. Co. v. Carolina Cas. Ins. Co., 133 Ariz. 395, 399 (1982) (holding that “the casual connection required is not proximate cause; i.e., the business of the named insured need not have caused the occurrence, it need only be related to it.”); Chartis Property Cas. Co. v. Alpert, 2013 WL 4430957 (2013).

Exclusions

Regardless of whether the phrase is found in an insuring clause (as in Colorado Cas., Regal Homes or Transportation) or an exclusion (as in Fimbres, 147 Ariz. at 76-77; and Chartis, 2013 WL 4430957, *6), Arizona courts still interpret “arising out of” to mean “flowing from” or “having connection with.” However, exclusions are construed narrowly against the insurer. Roberts v. State Farm Fire & Cas. Co., 146 Ariz. 284, 705 P.2d 1335 (1985). Therefore, while the meaning of “arising out of” does not change when found in an exclusion, that same meaning will be applied narrowly to the facts.

Other policy forms

See above. The meaning of the phrase is the same.

Coverage for punitive damages

Insurable?

Yes. State Farm Mut. Auto. Ins. Co. v. Wilson, 162 Ariz. 251, 257-258, 782 P.2d 727, 733-734 (1989) (holding “any public policy considerations militating against an insurer providing coverage for punitive damages [are] outweighed by the public policy that an insurance company which admittedly took a premium for indemnifying against all liability for damages, should honor its obligation”).

Distinction for statutory multiple damages?

Not applicable.

Additional Insured Endorsement

Contract or writing required

In Regal Homes, Inc. v. CNA Ins., 217 Ariz. 159, there was an oral agreement to procure additional insured coverage but no written agreement.

Analysis and factors considered for liability arising out/caused by of the named insured’s work

Arizona courts hold that AI endorsements using the “arising out of” language only require a causal nexus—not proximate cause—between the named insured’s work and the claims against the AI to trigger coverage. Regal Homes, Inc. v. CNA Ins., 217 Ariz. 159, 163, ¶ 14, 171 P.3d 610, 614 (App. 2007) (holding it was a fact question whether claims arose out of subcontractor’s work for the purpose of triggering additional insured coverage even when subsequent litigation determined that subcontractor had no fault). As such, courts apply the “arising out of language” broadly and will find a coverage obligation as long as the named insured’s conduct was “incident to or connected with” the claims against the AI. Id. at 163, ¶ 15, 171 P.3d at 614.

Coverage B- Personal and Advertising Injury

Meaning of publication for “oral or written publication of material, in any manner, that violations a person’s right of privacy” offense

There are no Arizona cases addressing this issue.